Non-Banking Financial Company (NBFC) is a branch of the financial institution registered under the Companies Act, 1956 and works similar to the bank but there are some restrictions on NBFC which makes it different from banks like NBFCs can’t issue credit or debit cards, cheque book and even NBFCs do not allow their depositors to withdraw their money before the maturity period and if any depositor wants to withdraw his deposited amount before maturity then he will have to pay penalty on his withdrawal.
NBFCs (Non-Banking Financial Companies) are one of the fast-emerging sectors of the Indian financial system. NBFCs are the financial institution other than commercial and co-operative banks that perform a variety of financial activities, like deposits accepting, making loans and advances, leasing, hire purchase, etc. NBFC raises funds directly or indirectly from the public and lends them to ultimate spenders. NBFCs give advanced loans to the various small industries, wholesale and retail traders, and self-reliant persons. Thus, they have diversified and broadens services and products in the financial sector.
NBFCs provide customer-oriented service with a simplified procedure and attractive rates of return on deposits. They also provide loans and advances to their customer for flexible time durations. So the NBFCs are being recognized as the substitute of the baking sector.
Difference between banks & Non-Banking Financial Company?
NBFCs work much similar to banks but there are some restrictions which make NBFCs different from banks like:
- NBFC does not accept demand deposits, unlike banks.
- NBFCs cannot draw cheques, issue demand draft (DD) like banks who use their own securities cheques and DDs for the purpose of payment and settlement.
- The NBFCs do not get the benefit of insurance coverage for their depositors cum investors but the depositors with banks are insured up to Rs 5,00,000 lakh.
Different types of Non-Banking Financial Company (NBFCs) registered with RBI?
NBFCs are categorized
- In the terms of the type of liabilities into Deposit accepting NBFCs and Non-Deposit accepting NBFCs, non-deposit taking NBFCs.
- By their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and by the type of activity, they conduct.
Further, Within this broad categorization the different types of NBFCs are as follows:
- Asset Finance Company (AFC): An Asset Finance Companies (AFCs) are those financial institutions whose principal business is the financing of physical assets supporting productive/economic activity, like automobiles, tractors, lathe machines, generator, earthmoving, and material handling types of equipment, moving on own power and general-purpose industrial machines. Principal business for this purpose is defined as an aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
- Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,
- Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
- Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 percent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.
- Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities.
- Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC): IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through the issue of Rupee or Dollar denominated bonds of minimum 5-year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
- Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:
- a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs 1,00,000 or urban and semi-urban household income not exceeding Rs 1,60,000;
- loan amount does not exceed Rs 50,000 in the first cycle and Rs 1,00,000 in subsequent cycles;
- total indebtedness of the borrower does not exceed Rs 1,00,000;
- tenure of the loan not to be less than 24 months for loan amount in excess of Rs 15,000 with prepayment without penalty;
- loan to be extended without collateral;
- the aggregate amount of loans, given for income generation, is not less than 50 percent of the total loans given by the MFIs;
- the loan is repayable on weekly, fortnightly, or monthly installments at the choice of the borrower
- Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.
- Mortgage Guarantee Companies (MGC): MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and the net owned fund is Rs 100 crore.
- NBFC- Non-Operative Financial Holding Company (NOFHC): NOFHC is a financial institution through which promoter/promoter groups will be permitted to set up a new bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.
What action can be taken against persons/financial companies making false claims of being regulated by the Reserve Bank?
It is illegal for any financial entity or unincorporated body to make a false claim of being regulated by the Reserve Bank to mislead the public to collect deposits and is liable for penal action under the Indian Penal Code. Information in this regard may be forwarded to the nearest office of the Reserve Bank and the Police.
Where can one find list of Registered NBFCs and instructions issued to NBFCs?
The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed at www.rbi.org.in
What precautions should a depositor take before placing deposit with an NBFC?
A depositor wanting to place deposit with an NBFC must take the following precautions before placing deposits:
- That the NBFC is registered with RBI and specifically authorized by the RBI to accept deposits. A list of deposit taking NBFCs entitled to accept deposits is available at www.rbi.org.in. The depositor should check the list of NBFCs permitted to accept public deposits and also check that it is not appearing in the list of companies prohibited from accepting deposits.
- NBFCs have to prominently display the Certificate of Registration (CoR) issued by the Reserve Bank on its site. This certificate should also reflect that the NBFC has been specifically authorized by RBI to accept deposits. Depositors must scrutinize the certificate to ensure that the NBFC is authorized to accept deposits.
- The maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5%. The Reserve Bank keeps altering the interest rates depending on the macro-economic environment. The Reserve Bank publishes the change in the interest rates on www.rbi.org.in → Sitemap → NBFC List → FAQs.
- The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, the name of the depositor, the amount in words and figures, rate of interest payable, maturity date and amount.
- In the case of brokers/agents etc collecting public deposits on behalf of NBFCs, the depositors should satisfy themselves that the brokers/agents are duly authorized by the NBFC.
- The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs.
- The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.
Is the conducting of Chit Fund business permissible under law?
The chit funds are governed by Chit Funds Act, 1982 which is a Central Act administered by state governments. Those chit funds which are registered under this Act can legally carry on chit fund business.
What are money circulation/Ponzi/multi-level marketing schemes?
Money circulation, multi-level marketing / Chain Marketing or Ponzi schemes are schemes promising easy or quick money upon enrollment of members. Income under Multi-level marketing or pyramid structured schemes do not come from the sale of products they offer as much as from enrolling more and more members from whom hefty subscription fees are taken. It is incumbent upon all members to enroll more members, as a portion of the subscription amounts so collected is distributed among the members at the top of the pyramid. Any break in the chain leads to the collapse of the pyramid, and the members lower in the pyramid are the ones that are affected the most. Ponzi schemes are those schemes that collect money from the public on promises of high returns. As there is no asset creation, money collected from one depositor is paid as returns to the other. Since there is no other activity generating returns, the scheme becomes unviable and impossible for the people running the scheme to meet the promised return or even return the principal amounts collected. The scheme inevitably fails and the perpetrators disappear with the money.